For some, technology represents their worst fear, a mysterious, perplexing world of hard drives, servers, and software. For others, it is an essential partner, an almost magical tool that helps solve their most pressing management and administrative challenges.
Most fee-only advisors fall somewhere in the middle of this using-technology spectrum. But when employed effectively, technology not only can streamline administrative tasks, it can also enhance asset management capabilities, augment client capacity, and increase overall office efficiency. In short, effective deployment of technology can improve the overall profitability and quality of an advisor's practice.
Whether due to the harsh investment environment of 2000-2003 or a natural evolution in the technology market, more products are now being designed for financial intermediaries. This creates opportunities for advisors, but may also result in difficult decisions.
The research and experience of Tiburon Strategic Advisors suggests that fee-only advisors are fairly cautious in adopting new technology, a caution that can be both good and bad. Advisors who are slow to adopt could be missing services and products that would streamline their operations and raise the quality of the services they provide. On the other hand, pursuing every new technology offering could waste an inordinate amount of time for advisors who are already challenged by demands on their time and energy.
Start With the Basics
Most advisors have three major objectives: to provide quality financial planning and investment management, to maintain a high level of client satisfaction, and to run an efficient office. In every decision related to technology, advisors should be asking specifically how the new technology will contribute to the achievement of these goals.
A key factor in the success of any technology initiative is the ability to allocate appropriate capital and personnel resources. The amount of money and time spent on technology should correlate to the life cycle of the advisor's practice. For a small firm, spending significantly on technology is probably not the most productive use of scarce capital; it's far better to install the minimum needed to run the practice and then focus on sales and marketing.
We will review the technology options available to help advisors achieve key business objectives, focusing primarily on investment capabilities and client service. We will then suggest key action items.
Technology and Investment Management
Since an advisor's business revolves around asset management, including financial planning, asset allocation, money manager selection, and portfolio tracking, this is naturally the area where advisors hope to achieve the greatest results from advanced technology products.
Following is a discussion of tools used throughout the asset management process, in descending order of their priority for most advisors. (This differs from the order in which advisors would normally use the tools with their clients.)
Portfolio Management Software
Managing client portfolios is the core of an advisor's business, and though it is possible to track accounts using tools as basic as an Excel spreadsheet, most advisors prefer a more sophisticated product.
For fee-only advisors, Centerpiece is generally the most popular portfolio management product. However, Tiburon has found that advisors with $200 million or more in assets under management are more likely to use Advent's Axys product.
Selecting portfolio management software has become particularly challenging, given some recent changes in the marketplace. Charles Schwab & Co. previously acquired the company that provides the popular Centerpiece software and, other than existing Centerpiece users, now makes the software available only to those advisors who use Schwab as their custodian. The most viable alternative to Centerpiece, Advent's Axys, has a number of advantages, but may not suit all advisors. Advent also acquired successful upstart TechFi, removing a promising new competitor.
Given the consolidation among portfolio software vendors, a number of advisors are struggling with decisions about their portfolio technology. However, transferring accounts to a new system can be potentially disruptive and time-consuming, so many advisors are likely to remain with their current provider unless it truly becomes a detriment to their client service.
Asset Allocation Software
Many advisors use software to determine appropriate asset allocations for their clients' portfolios, although some rely on a more conceptual "yellow pad" approach. Morningstar Principia is decidedly the leading provider in this category, among both smaller and larger advisory firms. Other providers include SUNGARD/Frontier AllocationMaster, Ibbotson Encorr Optimizer, and Integrated Capital Engine, or ICE, from Advisory World (formerly Wilson).
In the asset allocation area, the most significant trend in recent years has been the use of Monte Carlo simulations. Traditionally, most asset allocation software packages were fixed point calculations where the software provided one projected result for the client, given the supplied data.
Monte Carlo simulations acknowledge that the future is unpredictable. Using random number generation, a Monte Carlo simulation calculates a range of future values for a client's money.
These programs vary from vendor to vendor, so advisors should evaluate all features before selecting a program. Common features include the ability to:
o Choose either specific assets or asset classes or asset classes
o View underlying variables
o Adjust variables
o Handle one-time events
o Observe cash flow data throughout the period, rather than only an ending value
Data and Research Services
These enable advisors to analyze and compare mutual funds, variable annuities, separate accounts, hedge funds, individual securities, and other investments they might recommend to clients. This is Morningstar's primary area of expertise, clearly indicated by Tiburon's research among advisors. Over 76% of advisors report using Morningstar Principia or Principia Pro in their investment selection process.
Increased use of Internet-based information is an accelerating trend among advisors. Tiburon research indicates that a growing number of advisors visit Schwab, Morningstar, Fidelity, or other Web sites to research individual investment products.
Depending on their practice, advisors may or may not offer financial planning services. Many use Morningstar as a financial planning resource but they may be overlooking more functional alternatives such as Financial Profiles and Money Tree.
Trends in Client Service Technology
The second primary group of advisor technology tools includes those designed to enhance the client experience. The focus here is on improved delivery of information and service.
A few examples of popular technology in this area include:
o Advisor Web sites offering access to general information
o Online account statements for clients
o Client account aggregation, including accounts held with the advisor and accounts managed elsewhere
Offering a Web site, in particular, can build greater client confidence in an advisor. There are four key reasons to establish your own site:
o Increase client access to account information. Giving clients the ability to visit a firm's Web site, enter their password, and check their account balance at any time can have a surprisingly positive impact.
o Reduce costs. When clients visit a site for inquiries about straightforward information such as account balances, advisors can reduce costs and direct staff resources in a more productive fashion.
o Support marketing efforts. A Web presence is equivalent to putting a brochure about the firm in a place where anyone can access a copy. A Web site can also support a referral program: clients are often more comfortable pointing someone to a Web site for an introduction.
o Archive materials. This reinforces credibility. Advisors who maintain Web sites can archive research reports, articles, or other published materials. This can enhance the firm's credibility.
Another major trend in client service technology is account aggregation, which is expected to grow further in popularity. Advisors are paid to look at a client's entire portfolio and develop an asset allocation and management plan that considers all of the client's assets, even if the advisor is not managing the entire portfolio. This particular technology enhances that ability.
Aside from serving clients better, technology can also help advisors run their businesses more effectively. Key opportunities in this area include:
o Telecommunications. Does the office have caller identification? Do key personnel have cell phones? Instant messaging?
o Scheduling. Do the advisor and key personnel have personal digital assistants (PDAs)? Calendar software such as Microsoft Outlook can streamline the coordination of schedules within the practice.
o Office software. Does the firm have the latest Microsoft Office software?
o Paper management. Many advisors are striving for a paperless office. This means, at a minimum, investing in scanning technology to store client communications and other paperwork.
o Contact management. Is the advisor maintaining client information and tracking client contacts efficiently?
A contact management system is a prerequisite for every advisory practice. However, such a "system" can range from a file box with index cards to a highly developed program integrated with other data management software throughout your office. According to Tiburon research, the most popular contact management software products are Microsoft Outlook, Act!, and GoldMine.
Three advisor-centric contact management products may also be worth considering. ProTracker System, Junxure, and Junxure-i are attracting attention for their sophisticated client contact databases built specifically for advisors. However, Outlook, Act!, and GoldMine remain the most popular, and probably suit the needs of most advisors.
One important consideration stemming from the increased use of office management technology is the impact on compliance. For their own protection, advisors should establish standards for e-mail and instant message usage. These standards should clearly indicate that alternative communications methods are subject to the same compliance standards as traditional letters.
Technology Action Items
Advisors must prioritize their objectives, and focus on areas most likely to yield results to their practice. Here are three key action items:
Ensure a Long-term Portfolio Management Software Solution
The primary concern for advisors should be the integrity and efficient management of client account data, which means ensuring a long-term solution for portfolio management software. Given the recent acquisitions among software providers, that may be a challenge for some advisors.
The fundamental differences among software providers lie in the cost/capability trade-off. Some products may cost hundreds of dollars, while others cost $10,000 or more. Such a significant differential stems from the wide spectrum of capabilities provided by various products.
Advisors should be wary of paying for capabilities superfluous to their practice or, conversely, choosing an inexpensive product and then realizing belatedly that key capabilities are absent. For example, advisors who primarily recommend mutual funds to their clients may find it inadvisable to pay for additional capabilities related to individual stocks and bonds.
It is also important to fully understand pricing. Typically, portfolio management systems are priced in one of two ways. Some are sold outright with the option to purchase software updates as they are released. Alternatively, some products are licensed through an annual user fee. Before selecting portfolio management software, it is advisable to have a clear understanding of all fees, whether up-front, ongoing, or periodic.
Finally, gain a clear understanding of service levels. If possible, discuss the quality of updates and service support with other advisors before committing to a system. Ask to see demonstrations of each program module and confirm specifically which modules are actually available and whether any are still in development.
One final, critical issue is the tenure of the software provider. In recent years, the industry has seen a number of portfolio management products and providers come and go, some of which seemed extremely promising in their early stages of development. Advisors may be taking meaningful risks if they move to a new provider without a proven track record.
Investigate Application Services Providers (ASP)
An ASP offers individuals or businesses Internet access to applications and related services that would otherwise have to be maintained on the firm's own computers, and can meet many advisors' core technology needs. These services can be a valuable option for small businesses with limited budgets for information technology.
Advisors can use ASP models for asset allocation, financial planning, or other core capabilities. Benefits include:
o Immediate access to the latest version of available software. Eliminating periodic software updates can be extremely valuable given the speed with which these technologies change.
o Attractive pricing. ASP services may be priced on usage, which could be more cost effective than purchasing software or paying licensing fees, depending on volume.
o Data protection. ASPs generally provide nightly back-up, protecting against data loss.
The same issues of confidentiality that relate to outsourcing of client reports also are raised when using ASPs and advisors should carefully review the provider's security measures before releasing any data.
Consider Outsourcing Performance Reports
Monthly or quarterly performance reporting is a substantial burden on advisory firms, and they are increasingly outsourcing that task. By downloading data to a firm that specializes in performance reporting, the advisor can improve the delivery time, reduce costs, eliminate a significant source of stress on staff, and redirect resources toward more productive initiatives.
Two primary considerations relate to outsourcing: cost and security. Costs have declined recently but it is important to do a cost comparison between the firm's current system and the proposed vendor(s). In doing so, the firm must consider the opportunity cost of having staff occupied with this project for a significant period at the end of each quarter.
Equally important are concerns about client data security. To ensure that client information is secure, here are some precautionary measures:
o Work solely with reputable vendors. Check their references carefully.
o Request a written copy of their security policy, including their process for disposing of any damaged statements or other waste.
o Require them to sign a confidentiality agreement, confirming that they will maintain the security of all data and details related to your clients' accounts.
When You're Getting Started
Advisors in their early growth stages should not commit to significant technology spending. Recommended systems for these advisors are:
Portfolio management software. Efficient review of client accounts is a fundamental requirement for an advisory firm; however, a smaller practice can generally function effectively with a streamlined system.
Investment research. To make investment management recommendations, advisors need access to research and performance data. Again, a smaller practice can select less expensive options in this category.
Contact management. Tracking clients, professional affiliations, and vendors is essential to growing the practice. However, at this stage, a Rolodex or a simple spreadsheet may be an adequate substitute for more costly alternatives.
The Bottom Line
Although the results of new technology are not easily quantifiable, we believe that it can expedite services, reduce errors, and enhance an advisor's decision-making abilities.
To ensure that your firm is not missing out on opportunities created by technology products designed specifically for advisors, consider the following steps:
o Define an appropriate technology budget. A small firm should resist the temptation to spend heavily on technology whereas a more established business may be able to afford a larger commitment.
o Tap into local expertise. Consider working with a local technology consultant to evaluate your current systems and identify key enhancement opportunities. An independent consultant will likely be the most objective, but technology specialists from vendor firms can also provide valuable information as long as you remember that they are naturally biased toward their own products.
Chip Roame is managing principal of Tiburon Strategic Advisors in Tiburon, California, and Kenneth Tollmann is an executive director of Morgan Stanley Investment Management in New York. Roame can be reached at firstname.lastname@example.org; a free summary of Tiburon Advisors' benchmarking report is available at . Tollmann can be reached at email@example.com.